SME Finance and Growth: Evidence from RBL Bank

SME finance and growth: evidence from RBL Bank

Case Study 2017 Contents

1. Executive Summary x

2. Introduction x

2.1 Introduction to RBL x

2.2 RBL and Its Relationship with IFC & CDC x

3. Methodology x

3.1 Overview x

3.2 Sample Characteristics x

3.3 Caveats x

4. Analysis: SMEs after two years x

4.1 Employment x

4.2 Business Performance (Sales, Assets, Net income and Productivity) x

4.3 Female ownership and management x

5. SME Perspectives x

5.1 Impacts of Demonetisation x

5.2 SME Financing Requirements x

5.3 RBL Feedback x

6. Conclusion x

7. Appendix x

7.1 Regression Output x

7.2 Case Studies x

7.3 Benchmarks x

SME finance and growth: evidence from RBL Bank 2 This study is the result of a partnership IFC DISCLAIMER between CDC Group Plc, the International Finance Corporation (IFC), and RBL Bank. IFC, a member of the World Bank Group, The team would like to thank several creates opportunity for people to escape individuals who have contributed to this poverty and improve their lives. We report. Our gratitude goes to the RBL foster sustainable economic growth team — Mr Rajeev Janjanam, Mr Nishant, in developing countries by supporting Mr Anshul Swami, Mr Faiyaz Naikwadi. private-sector development, mobilizing Without their efforts, their provision of private capital, and providing advisory data, time, and information, their several and risk mitigation services to businesses follow-ups, coordination, and multiple and governments. reviews, this study would not have been The conclusions and judgments contained possible. The team is also grateful to the in this report should not be attributed SME clients of the bank who took the to, and do not necessarily represent the time to share their stories. views of, IFC or its Board of Directors or The Joint CDC-IFC team who managed the World Bank or its Executive Directors, the study was comprised of Mahima or the countries they represent. IFC and Khanna (IFC), Alice Kehoe (CDC) with the the World Bank do not guarantee the support of Alex MacGillivray (CDC) and accuracy of the data in this publication Kate Griffith (CDC). and accept no responsibility for any consequences of their use. The authors would like to acknowledge Ilaria Bennucci (CDC) and Anup Kumar Agarwal (IFC) for facilitating coordination with RBL Bank management and for reviewing the study. The authors also benefited from the data collection exercise conducted by consulting firm Market Xcel. In particular, the contribution of Paroo Tikoo and Ashwani Arora is valuable to the success of this study. The authors are also grateful for the guidance, insights, support, and feedback of Gaurav Malhotra (CDC), Maria Largey (CDC), Dan Goldblum (IFC), and Nilesh Srivastava (IFC).

SME finance and growth: evidence from RBL Bank 3 1. Executive Summary

600 million jobs need to be created by 2030 IFC’s relationship with RBL began with an to maintain the current employment rate equity investment in 2013 for a 4.5% stake. In along with expected population growth1. 2014, IFC also extended a IFC also extended Furthermore, most of these jobs should come a global trade finance program (GTFP) line from South Asia and Sub Saharan Africa, to RBL to help the bank provide short term where majority of the unemployed reside. working capital to SMEs. CDC first made This job creation goal is particularly relevant an equity investment of US$28 million in for India, the second most populous country RBL in March 2014 and followed it with in the world with 1.34 billion people. Also, it a pre-IPO investment of US$7 million in is believed that Micro, Small and Medium October 2015. CDC subsequently provided Enterprises (MSMEs) represent a significant tier-2 debt capital of about US$50m, and part of the world economy, and are one of the also participated in the recent preferential strongest drivers of economic development, placement to the extent of $100m USD to take innovation and employment. These MSMEs CDC’s shareholding to 6.9%. From December are expected to play a critical role in meeting 2013 – December 2016, the bank’s SME this job creation challenge. However, in portfolio has grown from USD 301 million to today’s world, most MSMEs are credit USD 841 million. constrained. A recent IFC study concludes that in South Asia, over 80% of MSMEs do not Financial institutions globally are directing receive the amount of credit they desire. significant efforts towards SME finance, The credit gap for MSMEs in India itself is often with the active encouragement of USD 230 billion2. development finance institutions (DFIs) and policy-makers. Yet there is currently little IFC, a member of the World Bank Group, and robust evidence on the impacts of loans on CDC Group Plc (“CDC”), aims to help people the performance of end clients, particularly in escape poverty and boost shared prosperity India and other emerging markets. Therefore, by promoting private-sector-led growth. the primary objective of this study is to assess To contribute to its agenda, they provide both performance at SMEs after receiving a loan investment and advisory services to financial from RBL Bank over 2012-15, in particular, institutions (FIs) like RBL. The goals of these whether they experienced changes in services are to expand access to finance for employment or in financial performance. local small and medium enterprises (SMEs), support the growth of their businesses, create The baseline for this study was collected new jobs, and consequently, stimulate the in June 2016 and the end-line was collected country’s economic growth. in April 2017 with the help of an external consultancy – Market Xcel. The primary data RBL Bank Ltd. (RBL) is a mid-sized scheduled collected by Market Xcel ranged from business commercial bank established in India in 1943. and employment data from over 100 randomly Being one of the oldest private sector banks selected SMEs. Performance was measured in the country it services approximately at the time of the loan and two years later, 1,900,000 customers. RBL is listed on to understand whether there had been any India’s National Stock Exchange (NSE) and changes resulting from the loan. Overall, the Bombay Stock Exchange (BSE). It offers a study triangulates data from secondary comprehensive range of banking products sources along with primary data from MIS, and services, with a special focus on Priority loan file reviews, field interviews with RBL’s Sector Lending (PSL) that includes supporting employees, and SME loan recipients, and underserved or unbanked customers. RBL’s uses simple statistical techniques, including investment in PSL sector as of 31st March 2017 regression analysis. The withdrawal of legal was 9,345.6 Cr. (US$ 1,392.8 million) or approx. tender status for 500 INR and 1000 INR 31.7% of total advances. denominations of bank notes issued by the RBI occurred during the study period, and should be kept in mind when interpreting the results, however the SMEs that recalled experiencing effects from the withdrawal reported that they were short-lived.

SME finance and growth: evidence from RBL Bank 4 Summary of selected results • Nevertheless, the SMEs, which employed 1,102 people at the time of loan approval, The table below summarises growth rates for still exhibited an annualised employment 113 SMEs since taking a loan from RBL. growth rate of 6% post-loan.

• A smaller group of fast-growth businesses Business Performance – known as ‘gazelles’ in the economics • Most clients in the sample increased literature – created almost all of the jobs. their incomes and sales in the two years Gazelles made up 27% of the sample. following the loan, growing income by 10% • 24% of the new jobs were for women. CAGR and sales by 9% CAGR on average. Only four in ten SMEs employed any • Assets grew by 7% since the loan, showing women, but clients with women involved that SMEs have had the ability to invest in in ownership or day-to-day management their businesses after covering costs. were more likely to employ women.

• Productivity also increased, with sales • On average, $1 million in financing for per worker growing at an annualised rate SMEs from RBL can be estimated to create of 6% since the loan. 10 – 15 direct jobs per year at the SME. • Extrapolating this to RBL’s overall SME Impact of SME growth on local portfolio since 2013, SME beneficiaries of employment RBL created 5,600 – 7,200 jobs. This does not include indirect employment in the • Given the short time period, the majority SMEs’ supply chains and resulting from of borrowers were able to grow their local spending of wages. businesses through better productivity without having to hire more staff. Indeed, productivity gains coupled with use of the loans for investment purposes led to more modest job creation rates after the loan.

Impact3 Average annual growth Proportion of businesses rate since loan (CAGR) that grew Sales 9% 85% Income 10% 80% Assets 7% 81% Employment 6% 27% Female Employment 4% 10%

SME finance and growth: evidence from RBL Bank 5 Customer Profile and Perspectives • 35% of clients intend to apply for a further loan within the next two years, for around • 79% of the clients reported that the loan 6.1m INR (or $98,000 USD) on average, which had made a difference to their business’ is over double the current average loan performance (consistent with the size. The most important factor in deciding proportion that had grown sales, income to take the loan would be the interest rate, and assets). followed by the loan amount available.

• 55% were first-time borrowers of formal • 14% of the MSMEs had female ownership, finance at the time they took the loan. in line with national averages. 22% of the For first time borrowers, 67% cited SMEs had women involved in the day-to-day personal finances as their main source of management of the business. financing before the loan, 63% had used loans from family and friends, and 56% had used moneylenders. Over half of first-time borrowers reported that access to finance had been an obstacle.

2. Introduction

2.1 Introduction to RBL RBL started its journey in 1943 in Kolhapur, RBL is listed on India’s National Stock Maharashtra in India as the Ratnakar Exchange (NSE) and Bombay Stock Exchange Bank Ltd. It was started by likeminded (BSE). It offers a comprehensive range of entrepreneurs and lawyers to provide banking products and services, with a special funding to local businesses. Until FY 2009- focus on Priority Sector Lending (PSL) 2010 the Bank’s reach was limited largely to that includes supporting underserved or Maharashtra, Karnataka, Gujarat and Goa. unbanked customers. RBL’s investment in In FY 2009-10, Vishwavir Ahuja was appointed PSL sector as of 31st March 2017 was 9,345.6 Cr. as MD and CEO of the Bank. He brought (US$ 1,392.8 million) or approx. 31.7% of together a team of banking professionals total advances. and overhauled operations, brand image, RBL’s strategy will be increasingly mapped to technology infrastructure and work culture. meet the needs of PSL segments. One of the In FY 2014-15 the Bank rebranded itself as key PSL lending strategies of the Bank lies in ‘RBL Bank Ltd.’ Between FY 2009-10 and funding MSME businesses through its Loan FY 2016-17, net deposits, net advances, net Against Property (LAP), Business Instalment profit and net assets have all grown at Loans (BIL) and Micro, Small and Medium compound annual growth rates (CAGR) in Enterprise (MSME) loans. These loans are the region of 50%. See Table 1 below. focused on small local businesses, which The number of branches and ATMs has also are poised to achieve higher growth but are grown from around 100 branches (across operating in a cash strapped environment. 5 States) in FY 2009-10 to 244 branches and 387 ATMs (across 19 Indian states and Union Territories) as at June 2017.

Table 1: RBL Bank Net Deposits, Advances, Profit and Assets in FY 2009-10 and FY 2016-17

INR Crore4 US$ million5 CAGR (local) FY 2009-10 FY 2016-17 FY 2009-10 FY 2016-17 Deposits 1,585 34,588 353 5,158 55.3% Net Advances 1,170 29,449 261 4,391 58.5% Net Profit 19 446 4 67 57.0% Total Assets 2,086 48,675 456 7,258 56.8%

Source: RBL Bank Annual Reports and Author’s calculation

SME finance and growth: evidence from RBL Bank 6 2.2 RBL and its relationship with CDC an ESG Committee which has met regularly and IFC since its investment and which has helped shape and drive E&S performance and Investment practice in the bank. In 2014 and 2015, IFC advisory services worked with RBL to In April 2013, IFC supported RBL through an create financial awareness amongst its equity investment of $22 million for a 4.5% end beneficiaries, particularly low income stake. In 2014, IFC also extended a global trade households. IFC considers RBL a long term finance program (GTFP) line to RBL to help strategic partner and has helped the bank the bank provide short term working capital to diversify its funding sources and to to SMEs. prepare for its initial public offering (IPO) in September 2016. CDC first made an equity investment of US$28 million in RBL in March 2014 and CDC has partnered with RBL to help improve followed it with a pre-IPO investment of financial literacy. In March 2015, CDC and RBL US$7 million in October 2015. With close to launched a new financial literacy program 5% equity, this made CDC one of the largest that has been rolled out in Madhya Pradesh. investors in the bank. CDC then provided Tier Building on RBL’s ‘Saksham’ program, it aims II debt capital to the sum of INR330Crs to increase financial inclusion by improving (c. USD 50 million) to RBL in September the financial literacy of around 25,000 2016, and also participated in the recent people and 300 villages in four districts of preferential placement to the extent of Madhya Pradesh. The programme, which was $100m, taking CDC’s shareholding to 6.9%. designed and implemented by Accion India, targeted rural areas where levels of education Collaboration and Initiatives are low and levels of financial exclusion are IFC has provided advisory and investment high. In depth classroom-style training has assistance to RBL to improve its corporate been supplemented by a mass awareness governance standards, asset liability and campaign, specifically catering for people risk management systems. CDC established with low literacy levels.

3. Methodology6

3.1 Overview and location, among other indicators. Also, the team conducted a qualitative analysis The evaluation team conducted a baseline of clients by visiting the premises of eight assessment in July 2016 to collect data at the clients to discuss the evolution of their time of the loan, and engaged survey firm businesses and the impact of their loan from Market-Xcel in April 2017 to collect end-line RBL (see Appendix 8.1). In addition, RBL’s data two years following the loan, obtaining team provided complementary data from its firm-level information on financial inclusion, MIS system. jobs supported7 and financial performance. A two-year period was selected to allow The end-line questionnaire included the business growth and employment effects same data as the baseline, but also included from the loan to materialize, while limiting questions on female management and external factors that could impact growth employment, the impact of demonetisation, over a longer period of time. potential future financing needs, and customer feedback. The questionnaire was For the baseline assessment, a sample of 200 translated into Hindi, Tamil, Kannada and active clients that received a loan of INR Telugu and disseminated across regional 500,000 (US$ 8,000) and above (and below hubs by the survey firm, Market-Xcel Pvt. Ltd. INR 100 million or US$1.6 million) during Then they collected the end-line data using the years FY 13 – 15 was randomly selected.8 an electronic survey, and interviewed the During the baseline data collection, the team majority of candidates in person. reviewed 183 SME client loan files to extract information such as number of employees In total, 115 of the original 183 clients were and gender breakdown, woman ownership interviewed; a coverage rate of 63%. 48 did not status, sales, assets, income, sector, firm age, wish to participate, 7 were unavailable, and use of financing, first time borrower status 13 of the respondents could not be reached.

SME finance and growth: evidence from RBL Bank 7 Once the dataset was finalised, outliers RBL Bank’s loans on job growth by estimating were removed using the interquartile range the following regression model using method, also known as the Tukey Method. cross-sectional data (Equation 1). Since the dataset comprised of multiple variables (age, collateral size, employment To extrapolate the total job creation over two at loan origination, change in employment, years since the SMEs received the loans, the sales and asset variables), removing outliers multiplier from the sample is applied to the for each variable would have been extremely target SME portfolio of the bank by the year restrictive. Therefore, only SMEs that had of origination. The multiplier indicates the outliers for at least 3 or more variables were average annual impact of the loans originated. removed from the dataset, resulting in 113 For example, total number of jobs added observations for the growth analysis. during 2014 – 2016 is calculated as follows: Jobs A basic linear Ordinary Least Squared (OLS) created due to loans originated in 2014 = US$ regression is used to assess the correlation loans in 2014 X annual multiplier X 2 (years) between bank loan amount and job creation Jobs created due to loans originated in 2015 = outcomes, controlling for a host of firm US$ loans in 2015 X annual multiplier X 1 (year). characteristics. We evaluate the impact of

Equation 1

∆ Jobs(t+2-t) = α + βiXi(t+2-t) + e Where: Jobs is the dependent variable, which is measured as jobs added per year Xi are explanatory variables which include the RBL’s loan at the origination as the main variable of interest and several control variables including macroeconomic variables; e is a fixed effect or a constant term; i is a marginal impact of an ’s explanatory variable on the dependent variable of interest. More information on the multiplier can be found in the appendix.

3.2 Sample Characteristics (113 SMEs)

Table 2: xxxxx

Characteristic Average Median Loan size (INR) 2,565,403 1,000,000 Loan size (USD) 46,203 16,569 Tenor 7 6 Interest Rate (%) 19% 20% Collateral Coverage (%) 260% 201% Proportion of companies taking Long term loans (> 3 years) 80% Medium term loans (1-3 years) 20% Source: xxxxx

3.3 Caveats Selection Bias The study is based on data collected from 113 There were 183 respondents in the baseline SMEs; this represents 20% of the population assessment, 113 of which were able to and is a large enough sample to minimize participate in the end-line survey. Respondents sample error. However, there are inherent that have not experienced growth or that do caveats which must be kept in mind while not have a good relationship with RBL may interpreting the results. These include: not have wanted to participate, meaning the results could be positively skewed.

SME finance and growth: evidence from RBL Bank 8 Recall the economy due to second-order effects on the value chain (suppliers and distributors) The accuracy of end-line survey data depends of the client SMEs, or induced effects from on the ability to recall historical data, which increased private consumption of client-SME would have been especially difficult for the employee households. micro enterprises that do not have formal records. Omitted Variable Bias

Measurement Error Changes in key variables may be influences by indicators not analysed in the study, Given the nature of the survey, measurement such as macroeconomic conditions, age, error is a likely issue in the data. Data for and management experience of business the end-line survey is as recorded by the owners. The omission of these variables SMEs to the surveyors, however there may limits statistical inference, particularly for have been sensitivity around some of the regressions that try to measure causal effects. variables, particularly income. For example, as clients were reporting data to their lender, Attribution they might have inflated their performance or minimized underperformance to appear It is difficult to isolate macroeconomic and creditworthy for future lending. business conditions in the country, and the total effects on key variables cannot be The extrapolated number of jobs created is attributed solely to the loans obtained from for the population of SMEs whose total loans RBL. In addition, other types of financing originated in 2014 and 2015 and range between such as those from informal sources and US$ 10,000 to US$ 1 million. The extrapolated from other FIs (where applicable) could be numbers presented here underestimate the driving the changes in variables as well. There impact of RBL’s SME lending operations in a is therefore no attempt to imply attribution number of significant ways. Firstly, we only to the bank or to CDC and IFC. calculated the impact of loans originated in 2015 for one year in order to estimate impacts Generalization and Prediction as of 2016, despite the fact that our model The results of this study are specific to the predicts impacts over at least two years. sample reviewed and can only be used to Secondly, the extrapolation exercise only extrapolate to a population with similar accounts for the direct impact on SMEs that characteristics. The multipliers should not be received the loan. Although economic theory used to extrapolate for non-representative highlights important mechanisms through populations, or predict effects in the future as which the initial direct impact ultimately these would not be statistically significant. creates an overall impact on the economy, this study does not capture indirect effects on

4. Analysis: Evolution of SMEs after two years

4.1 Employment owner/s, the gender of the owner/s, and the initial size of the capital investment. This result Link between financing and direct jobs is significant at the 90% level, and is likely representative of the population, the sample Results of the cross-sectional Ordinary Least covering 20% of eligible population.10 Squared (OLS) regression (presented in the Appendix) suggest that an increase of These estimates of the multiplier are US$ 1m in loans, holding other factors in line with other previous attempts at mentioned in the regression equation estimating a jobs multiplier. Khanna and constant, is associated with an increase of Singh (forthcoming)11 concluded that across 10-15 jobs per year (on average) over the study developing economies, SMEs create 5.3 jobs period.9 The regression takes into account per annum with each million dollars in that the effect on job creation depends on financing. Brown and Earle (2013)12 use data the sector, whether the firm took its first from the US Small Business Administration loan ever with RBL Bank, the purpose of the (SBA) loan program and estimate the creation loan, the age of the business, the age of the of 5.4 jobs per million dollars in loan value.

SME finance and growth: evidence from RBL Bank 9 The multiplier outperforms most of the the 10-15 jobs per million in loans multiplier multipliers from other studies, possibly is in line with these aggregated results, as India has experienced higher growth what is striking is that most experienced no compared to other geographies (Table 3). change in employment, and hence large job creators are pulling up averages, as shown It is difficult to extrapolate for all SME in the exhibit below. The majority of SMEs lending at RBL, given that the bank lends did not change their employment over five to SMEs through several other products. years: after loan approval, 27% of the firms Therefore, IFC’s loan size proxy has been increased employment, 65% stayed the used to determine which part of RBL’s same over the two years, and the remainder portfolio is likely to serve SMEs. IFC’s loan decreased headcount. The majority of those size proxies estimates that loans between reducing headcount cited market conditions $10,000 to $2m are likely to serve SMEs in as the main driver; “Due to low business there 14 emerging markets. From December 2013 to were layoffs…”, “Work came down”, and, “I had 2016, RBL increased its loans in this category to reduce my workers due to market”. from $301m USD - $841m USD, creating an estimated 5,600-7,200 jobs at the SMEs, and Therefore, while there is a significant several more in supply chain and in the relationship between SME financing and job spending of wages. creation, growth is only experienced by some high performing SMEs. This is consistent Average Employment Growth Rates at with findings in SME research, which the SMEs indicates that job growth is driven by a small group of strong performers, often referred to The SMEs employed a total of 1,218 staff two as “gazelles.”15 years after the loan, creating 116 jobs. While

Table 3: xxxxx

Study Geography Year of data Jobs per $1m Sample Size USD p.a. RBL study (2017) India 2014/15 - 2016/17 10.4 – 14.6 113 Forthcoming IFC methodology (2017) Emerging 2006-2015 3.9 – 7.1 50,000 Markets Au Financiers (2015) India 2012 70.0 128 Small Business Administration Loans USA 1991 - 2009 5.4 215,000 vs. Annual Employment Data (2013)

Source: xxxxx

Table 4: xxxxx

Indicator Average CAGR since Proportion of businesses Sample size time of loan that are growing Employment 6% 27% 113 Female Employment 4% 10% 110

Source: xxxxx

Figure 1: xxxxx

Source: xxxxx

SME finance and growth: evidence from RBL Bank 10 Figure 2: xxxxx

Source: xxxxx

Table 5: xxxxx

Source Year Sample Annual Annual Annual Annual growth rate: growth rate: growth rate: growth rate: all sectors manufacturing services wholesale & retail World Bank 2010 - 2013 6997 3.9% 3.2% 3.4% 4.9% Enterprise Survey, India (SME) McKinsey Global 2013 - 2015 100,000 1.3% 0.0-1.0% 10% in trade 10% in trade Institute (All) – 150,000 & hotels; 2% & hotels; 2% Household restaurants* restaurants* surveys Sixth All India 2005 and 58.5m 4.1% Not available by sector Economic Census 2013 enterprises (All) of all sizes Fourth All India 2012-13 (est.) MSMEs 4.9% Not available by sector MSME Survey 2001-06 MSMEs 4.4% 3.7% 6.8% 6.8%** (MSME) (actual) Average 3.7% 2.5% 5.6% 5.6%

* Most comparable sector for which data is available ** Same as services as data does not cover wholesale & retail sector

Average Employment Growth Rates by Industry Recent employment benchmarks for the wholesale and retail sectors are not On average, employment growth rates were readily available, but it seems to be at least positive, but they have slowed compared to in line with the World Bank Enterprise those of previous years, except in the case Survey data in FY10 – FY13, which had of wholesale and retail trade. All of the RBL an annualised rate of 5% for small and SMEs are generally outperforming or in line medium enterprises in the sector. Most of with benchmarks (Table 5). the businesses were taking a loan for stock and working capital, and it may be that • Wholesale & retail trade SMEs accessing a wider variety or cheaper stock experienced a 6% increase in employment enabled businesses to cater to demand on average, compared to 4% growth rates more effectively and grow. before the loan. While all of the sectors exhibited positive growth rates following • Manufacturing benchmarks are smaller the loan, this is the only sector to increase by comparison to the other sectors, with the rate at which employment grew. recent McKinsey analysis of India Labour There is a strong ‘gazelle effect’ present, Bureau statistics suggesting only a 0-1% as 15% of SMEs created 10 or more jobs, annual employment growth rate for the compared with 5% of the overall portfolio. sector from 2013-15. The large variance in In fact, just 24% of the businesses in the employment growth rates before and after segment created jobs compared with 28% the loan may be a reflection of the sector’s for manufacturing and 31% for services. cyclical and volatile growth more generally.

SME finance and growth: evidence from RBL Bank 11 • Services value add to GDP grew at Female Employment rates of around 8-10% from 2012-15 in India; higher than manufacturing or When outliers for female employment are 17 aggregated GDP growth during the same removed, the total job creation decreases period, which could partially explain to from 116 to 114 jobs. 24% of these jobs the high job creation rates for services went to women, at an average annualised SMEs in this sample. While job creation growth rate of 4%, and so is occurring at a has slowed from 13% to 11% for the RBL slower rate than total job creation (6%). This SMEs operating in services, this is still is largely driven by one company which outperforming similar benchmarks hired 10 women, removing this reduces this (between 6-10%). proportion from 24% to 16%. It must be noted 63% in this sample had zero female workers Employment Growth by Firm Age and Size at the time of the loan, and this proportion did not change following the loan. But this Literature suggests that small and young has to be viewed in the context of India firms create the most jobs, however, they are where female labour force participation also subject to more job destruction related to rates experienced a sharp decline from 37% 16 the existential issues of the SME itself. Here, in 2005 to 27% in 2012, and have remained at we find that young firms aged 5 years or less around 26-27% ever since.18 Kapsos et al (2014) grew their workforce the most, at a rate of estimate that 42% of the decline between 12% after the loan, however the category has 2010-14 is because of a lack of employment the highest degree of variation, suggesting opportunities for women due to occupational higher volatility amongst youngest firms. segregation.19 Promisingly, 22% of SMEs in When looking at firm size, micro and small the RBL sample had female management,20 firms tend to grow employment at a faster and these businesses grew their female rate than their medium-sized counterparts, workforce by an annualised rate of 13%, more growing at rates of 6% and 8% respectively, than double the overall female job creation compared with 2% growth. In addition, 21% rate. However, 78% of SMEs had all-male of the micro enterprises and 46% of the small management, and on average, they reduced businesses created jobs, compared to just 8% their female staff - only 2 SMEs with all-male of medium-sized businesses. management created jobs for women.

4.2 Business Performance21

Table 6: xxxxx

Indicator Average CAGR since Proportion of businesses Sample size time of loan that are growing Sales 9% 85% 113 Income 10% 80% 112 Assets 7% 81% 113

Source: xxxxx

Figure 3: xxxxx

Source: xxxxx SME finance and growth: evidence from RBL Bank 12 Sales The RBI sample experienced a 15% average growth in profit before tax from 2014 – 2016 On an aggregate basis, sales grew at across all industries. By sector this was an annual rate of 9% since the loan. By 16% for both manufacturing and services, comparison, small and medium-sized firms and 9% for trade, wholesale & retail. None in India’s most recent Enterprise Survey of the manufacturing SMEs in the sample reported an average rate of 8% from FY10 – had a growth rate as high as 16%, however FY13, and India’s GDP grew by 7% per year at 10-13% the best performers were close, 22 from 2013-17. The manufacturing SMEs led in and manufacturing was the only sector to sale growth, increasing at an average rate of exhibit double-digit growth across all firm 13% since taking the loan. The manufacturing sizes. However, 16% growth does seem to be sector grew by 11% in in 2015 (most recent exceptional given GDP and manufacturing/ data), and had an annual average growth rate services growth rates in the Indian economy of 7% from 2012-15, however the growth rates more generally. in this sector are erratic. The services sector in India grew by 10% in terms of GDP value- The SMEs operating in services tended to add in 2015,23 experiencing an annual average grow their income (10%) at a much faster rate growth rate of 9% between 2012-15. Although than sales (6%). This trend is not as present on a macro level the services segment has in other sectors. Only 1 of the services SMEs experienced higher rates of growth compared reduced headcount, so income gains cannot to GDP and manufacturing, in the survey be explained by layoffs. When compared only small businesses operating in services with the overall sample, a marginally outperformed services GDP growth, and higher proportion of these enterprises (29% it was the worst performing sector for the compared to 26%) reported using the loan rest of the businesses. Therefore, services towards investment and equipment upgrade, have underperformed, but manufacturing, which could have increased efficiency and led wholesale and retail and the sample overall to growth in income. It is also possible that have grown in line with or outperformed owners were most cost-conscious given the the market. small growth in sales, or that they managed to source cheaper labour and inputs, or The RBI’s reporting on non-government increase prices; improving margins. non-financial private company data has slightly higher benchmarks, with a 10% Assets annual average annual growth rate in sales from 2014 -2016. It also reports by sector; 8% The Fourth All India MSME Survey (2013) manufacturing, 15% for trade, wholesale & reported 5% growth in assets in 2005-06, retail, and 13% for services (excluding trade, estimating it to reach 7% for the year ending wholesale & retail). Using this benchmark, 2012-13. Following the same trajectory as manufacturing SMEs in the survey the 2001-2013 data, we could expect average outperformed the private limited businesses growth in assets for MSMEs to be between on sales, but the other sectors lag behind the 8 – 9% between 2013-2017. Overall, the assets overall and sector averages. grew at 7% annually since the loan, with manufacturing investing the most in assets Income at a rate of 9% since the loan. Medium-sized manufacturing enterprises significantly The average net income growth rate is outperformed benchmarks, with asset 10% across the SMEs, with medium-sized growth of 22%. Wholesale and retail segment enterprises tending to outperform the other grew their assets in line with the benchmark, sized enterprises at a rate of 11%. While sales reaching 8%. Services grew their assets the growth was between 6% - 14% depending on least, experiencing 4% annual growth. The the sector, there was less variation in income lowest recorded asset growth rate from the growth: again, manufacturing leads with 11%, All India MSME Survey is 5% in 2003-04. This followed by services (10%) and wholesale & means that the services sector has not only retail (9%). underperformed in sales growth, but it has also invested the least in assets.

SME finance and growth: evidence from RBL Bank 13 Productivity 4.3 Female Ownership and Since the loan, 69% of SMEs have improved Management sales per worker, 27% of the firms in the 4% of the SMEs had majority female sample have decreased it, and 1 stayed ownership, which is slightly below national constant, growing at an average CAGR of averages of 14% in the registered sector and 6% since the loan. While manufacturing was 9% in the unregistered sector. 14% of the the lowest job creator, growing at a rate of SMEs had some form of female ownership, 1%, it has increased productivity the most, including women who were co-signatory or on average growing by 48%, followed by had their name on the business registration. wholesale & retail (15%), and services (0%). When collecting baseline data, there While the services category had no growth was concern that using co-signatory and in productivity, it had hired people at the registration information to better understand fastest rate before receiving the loan, and female economic participation may be so this may be a reflection of the cost of overstating their involvement, as wives were training new staff, with the new employees often signing as guarantors. However, a not contributing to increased sales/profits greater number of women were reported to yet. Of the SMEs that improved sales per be involved in the day-to-day management of worker, the average CAGR was 40%, driven SMEs than ownership (22% female involved in by a combination of an average sales increase day-to-day management compared with 14% of 13% since the loan, and average staff of female ownership), suggesting that this is reduction of 2%. actually a conservative measure.

Sales per worker as a metric of productivity Although a small sample, SMEs with has its issues however: first, certain sectors some form of female ownership improved like retail/services will perform badly in productivity to a greater extent than the comparison to others like manufacturing rest of the SMEs. On average, those with or software, also, in the short-term job cuts female management also created more will increase the metric, but this might not jobs, especially those for women, and be sustainable if the staff are overworked. outperformed in sales, income and asset In addition, it assumes a linear relationship growth, supporting the evidence that gender between employment and sales when the latter diversity can enhance business performance. is also affected by pricing and market demand.

Figure 4: xxxxx

Source: xxxxx

Table 7: xxxxx

Results across all SMEs SMEs with female SMEs with women in (CAGR since loan) ownership (CAGR) management positions (CAGR) Employment 6% 6% 8% Female Employment 4% 11% 13% Sales 9% 17% 11% Income 10% 8% 13% Assets 7% 13% 9%

Source: xxxxx

SME finance and growth: evidence from RBL Bank 14 5. SME Perspectives

5.1 Impacts of Withdrawal of Legal source of financing before the loan, 63% had Tender Status for 500 INR and 1000 used loans from family and friends, and 56% INR Notes had used moneylenders. This suggests that while financing from informal finances may The government of India vide their be available, formal finance is less so, even Notification no. 2562 dated November 8, 2016, in quite established cities in India where the withdrew legal tender status for 500 INR and survey took place. Formal financing most 1000 INR denominations of banknotes issued likely allows SMEs to borrow larger amounts by the Reserve Bank of India. Overall, the than from personal or family and friends, and SMEs in this sample felt that the policy had also at better rates than moneylenders. It also an immediate effect on business when it was enables SMEs to build a credit history, which announced, for instance, a medical provider could again improve the rates and amounts stated that walk-ins decreased; a distributor of financing, and also enable them to access was unable to sell grain while markets were other financial products. So the question of closed for 12 days, and one hardware retailer SME access to finance is more nuanced than suffered as construction was halted following physical locations; it also requires analysis the announcement. On average, the SMEs in of when they reach the limit where informal this sample perceived that demonetisation finance no longer serves their needs. temporarily reduced monthly sales by 22%, Purpose income by 24%, and stock by 2%, although these results are based on recall and should 51% of the SMEs used the loan for a different be treated as estimates. But by the time purpose than stated at loan application, the survey was conducted in April 2017, the around half of these who used the loan for sampled SMEs largely felt that business was working capital had originally intended to back to normal. Based on this check, we are use the loan for another purpose. 77% of the reasonably confident that the results SMEs that originally planned to use the loan hold true. for a combination of investment and working 5.2 SME Financing Requirements capital ended up using the loan for working capital only, perhaps showing a desire to Source invest in their businesses, but being unable to do so after covering costs. Also, over half of Over half of respondents also replied that the SMEs used the loan for multiple purposes, access to finance was not a constraint, rather than using it for a single purpose as however 55% of SMEs were first-time per loan application, showing that SMEs have borrowers of formal finance. 77% of the a wide variety of financing needs. SMEs cited personal finances as their main

Figure 5: xxxxx

Source: xxxxx

SME finance and growth: evidence from RBL Bank 15 5.3 RBL Feedback attributes the SMEs would consider when taking out a new loan would be: interest rate, 35% of SMEs intend to apply for a new loan loan amount available, and speed of approval in the next two years, for an average amount process. 75% of applicants considering a new of 6.1m INR ($91,000 USD – more than double loan agreed that RBL could contact them to the current average loan size in the sample). do so. Finally, 79% of the respondents felt that Of those intending to apply for a new the RBL loan had made a difference to their loan, 46% would take the loan for working business’ performance; consistent with the capital, followed by investment (22%), and proportion that had grown sales, income equipment/machinery upgrade (20%). and assets. In order of preference, the most important

6. Conclusion

In conclusion, the SMEs showed impressive those that are shrinking, it may be misleading financial growth, increasing their assets, to use average growth rates and multipliers income and sales at annualised rates to assess the development performance and of 7-10% since the loan, and generally health of the SME sector. outperforming or performing in line with market growth. 69% of SMEs also increased Interviews with SME clients of RBL bank their productivity, growing by an average revealed their level of satisfaction with of 6% since the loan. 79% felt that the loan and appreciation of the impact that had made a difference to their business’ the relationship with RBL had on their performance, as they had been able to businesses. They were able to expand buy stock at a discount, increase product their business, create some additional jobs, offerings, and expand stores, amongst other maintain the existing jobs, increase sales, uses. Over half of the SMEs were first- and consider further expansion plans for the time borrowers of formal finance, having future. previously relied on personal finances, family The findings of this study reinforce the and friends, and moneylenders, to fund their following: business. These sources of financing are limited either by small amounts available, or • Financial intermediaries like RBL, which high interest rates. Therefore, we can posit provide access to finance for SMEs in that without access to the loan, the SMEs underserved markets, can be expected would not have been able to grow and invest to have significant effects on financial in their businesses to the same extent. inclusion, job creation, reducing the size of the MSME gap and also positively affect In addition, the study found that there is SME financial performance. a significant relationship between SME financing and annual change in employment, • IFC, CDC and its financial intermediary with regression analysis indicating that clients (like RBL) should continue to around 10 – 15 jobs are created per year support SMEs and help them grow, as per million dollars from RBL to SMEs. RBL SMEs have the potential to realize impact increased its financing reaching SMEs by on employment and, consequently, 301m USD to 841m USD from December 2013 economic growth. -16, which would have created an estimated 5,600- 7,200 jobs at the SMEs, and several • There is a need to undertake more additional jobs in the SMEs’ supply chain research to better understand the effects and through the spending of wages. The of access to financial services on financial SMEs grew their employment at an average inclusion, job creation, and clients’ annual rate of 6%, however most of the SMEs financial performance per different types did not change their headcount following of financial intermediaries, financial the loan, so large job creators are pulling up products, and geographical locations. average growth rates. While it is true that the effects of the best job creators outweigh

SME finance and growth: evidence from RBL Bank 16 As next steps, it is suggested that FIs lending • Consider offering a non-financial services to the SME sector in India: product to SMEs that may benefit from it. Some of the select SME clients that the • Undertake similar studies for the rest of team interviewed expressed interest in their financial inclusion portfolio, even improving their business skills through conducting a larger study with a much training. bigger sample size to compare profitability, and evolutions of SMEs benefiting from different loan products.

• Continue to focus on the women-owned firm segment, based on the fact that this study’s sample contained very few women- owned firm and demonstrated that this is a profitable segment.

Appendix: Regression Output

Table 7: xxxxx

Variables (3) (4) (5) (6) emp_annual_ch emp_annual_ch emp_annual_ch emp_annual_ch loan_size_usd 10.439* 14.598* 14.092* 14.206* [5.823] [7.533] [7.910] [7.882] log_sales 0.364** 0.194* 0.192** [0.172] [0.096] [0.092] log_age -0.419 -0.159 -0.183 -0.180 [0.324] [0.402] [0.437] [0.441] Manuf -0.688 -0.431 -0.830 -0.834 [0.603] [0.522] [0.536] [0.529] Retail -0.811* -0.710 -0.650 -0.661 [0.427] [0.476] [0.420] [0.414] fem_owned 0.458 0.146 [0.628] [0.601] sales_annual_gr

sales_annual_ch 0.000 0.000 0.000 [0.000] [0.000] [0.000] Tenor -0.177** -0.202** -0.202** [0.086] [0.090] [0.091] first_time -0.924 -0.901 [0.648] [0.664] Constant 1.583 -2.014 0.675 0.659 [1.133] [2.232] [1.823] [1.855]

Observations 112 112 112 112 R-squared 0.168 0.225 0.285 0.286 Regression Annual Change Annual Change Annual Change Annual Change SE Cluster Location Location Location Location

Robust standard errors in brackets *** p<0.01, ** p<0.05, * p<0.1

SME finance and growth: evidence from RBL Bank 17 Case Studies

The case studies are presented in the order in which the businesses were visited.

Case Study #1. LAP Loan to Increase Stock of Gold Jewellery

+ Type of Business Jewellery shop + Time Owned 18 Years + Loan Type LAP + Loan Amount 1 Crore (US$160,000) + Year of Loan 2013 + No. employees (of which female): At time of loan 10 (1) Current 10 (1)

The borrower has owned, a jewellery shop in Thane on the outskirts of Mumbai for 18 years. In 2013 he took out a rupees one Crore loan with RBL bank to increase his stock of gold jewellery, to attract more customers.

However, the market has since been difficult and business growth has stagnated – including the introduction of a 1% excise duty on gold jewellery leading to jeweller strikes at the beginning of this year. Given the difficult market, the borrower sees sustaining the business, including all ten employees, as a success. He doesn’t have any expansion plans, but would consider another RBL loan if they reduced their interest rate. It is a very competitive environment, with lots of bankers approaching him to offer their financial products and services: the lower the interest rate, the more attractive the loan.

Case Study #2. LAP Loan to Increase Stock of High-End Sarees

+ Type of Business Designer saree shop + Time Owned 16 years + Loan Type LAP + Loan Amount 1.5 Crore (US$240,000) + Year of Loan 2012 + No. employees (of which female): At time of loan 21 (0) Current 29 (0)

The borrower has run the business alongside his brother for 16 years. The business is a designer saree shop specialising in wedding sarees and one warehouse, where five “masters” produce high-end ornate sarees.

The shop provides a wide range of wedding sarees starting at 600Rs (US$9) up to 80,000 Rs (US$1,200), many of which are sourced from Karnataka in southern India or made in the warehouse. Four years ago, the brothers took out a 1.5 Crore loan with RBL bank to increase their stock. Previously, they banked with a different provider, but moved to RBL because their previous provider was unable to offer an overdraft facility. The borrower now has 18 accounts with RBL, including personal and business current and savings accounts for both himself and his family. Taking out the loan enabled the brothers to increase their stock and in particular to invest in high-end products, which has driven a 30% growth in sales and an 8-10% growth in profits. As a consequence, they have needed to recruit six additional workers and two masters, with the overall workforce increasing from 21 to 29, over the life of the loan. The brothers plan to invest their additional profits in new assets and hope to open a second shop in the next 2-3 years, for which they may require a second loan.

SME finance and growth: evidence from RBL Bank 18 Case Study #3. LAP Loan for Working Capital & Machinery

+ Type of Business Bus stop manufacturer + Time Owned 27 years + Loan Type LAP + Loan Amount 35 Lakhs (US$56,000) + Year of Loan 2012 + No. employees (of which female): At time of loan 100 (0) Current 82 (0)

The borrower owns a business manufacturing, installing and maintaining bus stops in response to local government contracts. In 2012 he took out a 35 Lakh loan for working capital and machinery. At that time, he was working on a big contract and had around 100 employees.

Currently he employs 82 workers, with 75 focused on installing and maintaining the bus stops and eight manufacturing bus stops in the warehouse. Depending on the size of the contract, the borrower hires more or less workers. The macro-economic environment hasn’t been too good since taking out the loan, but sales have remained steady and profit margins are around 20- 30%. Currently he only banks with RBL.

Case Study #4. BIL Loan to Build Stock & Set-up Manufacturing Unit

Kitchen utensils manufacturer + Type of Business & trader + Time Owned 16 years + Loan Type BIL + Loan Amount 30 Lakhs (US$48,000) + Year of Loan 2014 + No. employees (of which female): At time of loan 21 (0) Current 29 (0)

The borrower and his family own a business manufacturing and trading kitchen utensils. They own two warehouses and rent two additional warehouses, where they receive and pack the utensils before dispatching to retail outlets.

There are four family members working in the business and when they took out a business instalment loan four years ago, they employed 25 people. The loan allowed them to build stock and to set up a manufacturing unit. They now manufacture 90% of their own products, with manufacturing units in Delhi, Malad and Jalgaon employing 48 people. Sales have grown by 18-20% and the number of warehouse labourers has risen from 25 to 60 (35 of whom are women). Retention has been excellent, with no staff members leaving in the past two and a half years. Demand for their products is strong vis-à-vis competitors as consumers prefer products produced domestically. Also they ensure their products have useful features that distinguish them from other products on the market, such as producing pans that are non-stick. This was the family’s first loan for large-scale expansion. They selected RBL due to the quality of the service and a slightly lower interest rate. They see further opportunities to expand the business, with estimated demand at least 25% higher than filled orders and are keen to establish their own brand. They have recently needed to take out a top-up loan with RBL, as dealing in higher volumes has increased their working capital needs (shops in malls require 90 days’ credit).

SME finance and growth: evidence from RBL Bank 19 Case Study #5. MSME Loan to Expand Hardware Stock

+ Type of Business Hardware shop + Time Owned 5 years + Loan Type MSME 5 Lakhs (US$8,000) unsecured + Loan Amount 5 Lakhs (US$8,000 secured + Year of Loan 2015 & 2016 + No. employees (of which female): At time of loan 1 (0) Current 3 (1) full-time equivalents

The borrower owns a hardware shop in Dombivali, an urban centre near to Mumbai. He took out a five Lakh unsecured loan with RBL a year ago, followed by a second secured rupees five Lakh loan 6 months later, to expand his stock and working capital.

Being able to extend credit lines to local builders has meant that they have given him much more business, and compared to individuals they place much larger orders e.g. 20 buckets instead of a single bucket. His sales have doubled and his profit margins have also increased due to economies of scale (from 10-15% to 20- 25%). Five family members now work in the business, the borrower, his wife, older brother and two children part-time (after they have finished school and college respectively). Prior to taking out the loan the shop provided work for just two family members. The borrower now has a current account with RBL and chose them based on the ease of application. Whilst business has grown very well, he doesn’t require further loans at this time, as the construction market (his main clients) has been a little unstable, which creates some risk when offering credit lines

Case Study #6. MSME Loan to Purchase Raw Materials

Pharmaceutical equipment + Type of Business manufacturer + Time Owned 17 years + Loan Type MSME + Loan Amount 3.5 Lakhs (US$5,600) unsecured + Year of Loan 2016 + No. employees (of which female): At time of loan 2 or 3 (0) Current 12 (1)

In December 2015, the borrower, a pharmaceutical equipment manufacturer, rented new premises under a new 10-year lease.

At 1,500 square foot, this was five times bigger than her previous premises. To capitalise on the additional space, the first-time borrower, needed a loan to purchase additional raw materials (e.g. steel sheets, pipes etc.) from suppliers in Gujarat, Mumbai and Delhi. Since her requirements were relatively small, RBL was able to approve a 3.5 Lakh unsecured Business Instalment Loan in early 2016, enabling her to ramp up production. This in turn created a need for more workers, with the borrower increasing her workforce from 2-3 employees to 12. She provides on-the-job training to build the necessary skill sets, rather than trying to source these. Together, the new premises and loan have led to an estimated 60% increase in sales over the past 6 months, with 40% of products exported to countries such as Sudan and Ethiopia and the remainder sold in India. In addition to expanding production, RBL’s loan has enabled her to start building a credit history. She is hoping to open a masala business to diversify her income and may need additional loans to finance her plans.

SME finance and growth: evidence from RBL Bank 20 Case Study #7. MSME Loan to Purchase Raw Materials

Manufacturers dentures & + Type of Business dental supplies + Time Owned 7 years + Loan Type MSME + Loan Amount 2.5 Lakhs (US$4,000) (unsecured) + Year of Loan 2016 + No. employees (of which female): At time of loan 3 (0) Current 6 (0)

The borrower has run a business manufacturing dentures and dental supplies since 2009. At the beginning of this year, she took out a 2.5 Lakh loan to purchase additional raw materials, enabling her to fill more orders.

As a consequence, sales have gone up by an estimated 10-15%. She has also achieved slightly better margins as she is able to buy the raw materials in bulk. To enable the increase in production, she has needed to increase employment from three to six, and now employs two technicians and four delivery boys. She selected RBL because they provided a loan very quickly (within five days). She may look to expand further in a few years, but is happy with the current size of the business for the time being.

Case Study #8. MSME Loan to Expand Customer Choice

+ Type of Business Grocery store + Time Owned 10 years + Loan Type MSME + Loan Amount 7 Lakhs (US$11.200) secured + Year of Loan 2015 + No. employees (of which female): At time of loan 2 (1) Current 5 (1)

In December 2015, the borrower, a pharmaceutical equipment manufacturer, rented new premises under a new 10-year lease.

He used it to purchase a fridge and other equipment (such as containers for pulses) and to increase stock to provide customers with more choice, including chilled soft drinks and other cold storage products. Monthly sales have since doubled and he has needed to employ three additional helpers (originally, he and his wife had just one helper). After servicing the loan, profit is up around 10-15%. This is the borrower’s first ever loan and he is considering applying for another loan next year for a second shop or a home.

SME finance and growth: evidence from RBL Bank 21 Benchmarks

Fourth All India MSME Survey Sixth All India Economic Census The Fourth All India Census of MSME The most comprehensive database on is the most recent MSME census, and employment and firm characteristics in India collected data on employment, assets is the Economic Census conducted by the and firm characteristics for MSMEs, with Central Statistics Office (6th Report of 2016), the reference year 2006-07, subsequently which contains data as at 2013. The survey publishing results in 2011-12. This census in does not collect data on financial indicators, this form has since been discontinued, and focusing more on firm characteristics such as the Ministry of MSMEs intends to use its new sector of operation, rural or urban location, online platform for MSME registration to proprietorship, female entrepreneurs; conduct surveys online more cost effectively. amongst others. While this survey provides The Ministry announced plans for the first more recent data for benchmarking online census of MSMEs using the platform compared to the All India MSME Survey, the in August 2016, but it is uncertain whether profile of the enterprises included in the this has occurred, and no results have been census differs from that of the RBL sample. published.25 First, this survey includes businesses of all sizes across India: 96% of the sample had 1-5 workers, 3% had 6-9 workers, and the India’s Labour Bureau Statistics remaining 1% employed 10 or more. This is compared to 53%, 18% and 31% respectively Annual Employment/Unemployment Survey for the RBL MSME sample. In addition, 22% of the establishments in the census were For the last four years, India’s Labour involved in agricultural activities, and 60% Bureau has conducted annual employment/ were in rural areas. The RBL SMEs are not unemployment household surveys, and directly involved in agricultural activities and while the most recent data is for 2015-16, and are in towns or cities. therefore it is not as recent as the quarterly employment surveys, it is drawn from a much larger sample of 100,000 to 150,000 households.26 Reserve Bank of India In 2016, the Reserve Bank of India corporate Quarterly Employment Survey sector data covering financial performance India’s Labour Bureau publishes employment of non-government non-financial private growth rates by sectors on a quarterly companies.28 This dataset is compiled from basis. The expanded sample covers 81% of the audited annual accounts of 237,398 private businesses with more than 10 employees, but limited companies received from the Ministry the majority of Indian businesses are smaller of Corporate Affairs, for the periods 2014-15 in size, meaning this sample only represents and 2015-16. This dataset would not contain about 1.4% of enterprises in the country, and results from very small companies that are accounts for 21% of non-farm employment.27 not formally registered or those that do not This does not disaggregate by firm size. have audited accounts.

SME finance and growth: evidence from RBL Bank 22 Bibliography

A. MacGillivray et al., “Measuring Total Employment Effects: a lean data methodology for a portfolio of investments in developing countries” (February 2017)

Kapsos et al., “Why is female labour force participation declining so sharply in India?” (ILO, August 2014)

“The Big Business of Small Enterprises: Evaluation of World Bank Experience with Targeted Support to Small and Medium-Size Enterprises, 2006-12” (World Bank, 2014)

“India’s labour market: a new emphasis on gainful employment”, McKinsey Global Institute (June 2017)

Brown, J. David and Earle, John S., 2013. “Do SBA Loans Create Jobs?” US Census Bureau Center for Economic Studies Paper No. CES-WP-12-27

Khanna and Singh (Forthcoming): Job Creation by Small and Medium Enterprises from Financing, IFC Publication

Khodakivska, A. “IFC’s Loan Size Proxy: A Reliable Predictor of Underlying Small and Medium Enterprises in the IFC’s Financial Markets Portfolio” (IFC, 2013)

“Promoting Financial Inclusion in India: Evidence from Au Financiers” (IFC, 2015)

SME finance and growth: evidence from RBL Bank 23 Notes

1. World Development Report (2012). 2. IFC’s Enterprise Finance Gap (2017). 3. Sales, income and assets are in nominal terms, and employment numbers in headcount. 4. Cr. indicates Crore, an Indian unit of currency measurement, which is equal to 10 million. 5. The following annual average exchange rates have been used for the report: 2010: 47.6; 2011: 45.8; 2012: 48.3; 2013: 54.4; 2014: 60.4; 2015: 61.1; 2016: 65.4; 2017: 67.1. 6. This study is based on a methodology designed by IFC in 2014 called Expanded Appraisal and Supervision. Similar studies have been conducted with financial institutions across developing economies. 7. For the purposes of this study, the term “jobs supported” means direct jobs in the SME. 8. SMEs in India are defined by their total investment in machinery and equipment. Enterprises who take loans of INR 5,00,000 (US$ 8,000) are assumed to have a total investment of at least INR 10,00,000, which is the local definition of an SME. The upper threshold of INR 100 million (US$1.6 million), in line with the maximum LAP loan size, excludes large corporates and limits the analysis to SMEs. BIL and LAP loans originated in FY13/14 were selected to coincide with CDC and IFCs investment in RBL. The MSME loan business started in FY2014/15, meaning this was the earliest year the sample for the baseline study could be drawn. 9. Since the sample consists of only enterprises that were able to obtain a loan, the results can be interpreted as the correlation between loan amount and job creation conditional on obtaining bank financing. Furthermore, the Ordinary Least Squared estimation is only suggestive of an association between loan amounts and jobs, and does not predict a causal relationship. 10. The population is defined as all loans originating in the reference year, at or above the minimum size threshold. 11. Khanna and Singh (Forthcoming): Job Creation by Small and Medium Enterprises from Financing, IFC Publication. 12. Brown, J. David and Earle, John S., 2013. “Do SBA Loans Create Jobs?” US Census Bureau Center for Economic Studies Paper No. CES-WP-12-27. 13. 690,000 INR is linked with 1 job, or 70 jobs per 1m USD financing. “Promoting Financial Inclusion in India: Evidence from Au Financiers” (IFC, 2015), https://www.letswork.org/wp-content/uploads/2015/09/AU-Financier-Development- Report-July-2015.pdf. 14. These loan proxies were determined using data on loans, sales, employees and assets from 1,978 enterprises. In less than 1.7% of the cases loans between $10,000 - $2m USD were made to large enterprises. Khodakivska, A. “IFC’s Loan Size Proxy: A Reliable Predictor of Underlying Small and Medium Enterprises in the IFC’s Financial Markets Portfolio” (IFC, 2013). 15. The notion of a select few high-performing “gazelles” driving aggregate is referenced in Birch et al (1995) (Birch, David L., Haggerty, Andrew and Parsons, William (1995), Who’s Creating Jobs? Boston, MA.: Cognetics Inc.). Given the distribution of SMEs, this trend of the mean level of key variables being higher than the median continues throughout the analysis. 16. The Big Business of Small Enterprises: Evaluation of World Bank Experience with Targeted Support to Small and Medium-Size Enterprises, 2006-12” (World Bank, 2014), citing Ayyagari, Demirgüç-Kunt, and Maksimovic 2013; Hsieh and Klenow 2012; Klapper and Richmond 2011). 17. Creating a sample of 110. Entries where the number of women employed is greater than the reported total number of employees were assumed to be errors and removed. 18. Labour force participation rate, female (% female population aged 15+), ILO 2014. 19. Kapsos et al., “Why is female labour force participation declining so sharply in India?” (ILO, August 2014). 20. Sample removes an error where number of female management staff was great than the number of employees. 21. Table removes an SME from income analysis which is likely an outlier (income CAGR of 2458%), resulting in a sample of 112. 22. “India’s labour market: a new emphasis on gainful employment” McKinsey Global Institute (June 2017). Most recent WBG data has 8% in 2015, but a slowdown to 5% growth in 2012, resulting in an annual average growth rate of 7% from 2012-2015. 23. World Bank National Accounts Data. 24. Defined according to IFC loan size proxies, where loans between $10,000 and $2m USD are likely to be funding SMEs, according to research from IFC database matching jobs, assets, sales and loan sizes. 25. “Finance minister to launch MSME databank, finance facilitation centres”, The Times of India (August 2016). Accessed June 2017: http://timesofindia.indiatimes.com/business/india-business/Finance-minister-to-launch-MSME-databank- finance-facilitation-centres/articleshow/53633264.cms. 26. “India’s labour market: a new emphasis on gainful employment”, McKinsey Global Institute (June 2017), p.9. 27. “India’s labour market: a new emphasis on gainful employment” McKinsey Global Institute (June 2017), p.4. 28. The RBI also publishes datasets for the following as part of the corporate sector reporting: FDI companies, listed non-government financial companies, non-government non-banking financial and investment companies, and non- government non-financial public companies. Accessible via Reserve Bank of India, https://dbie.rbi.org.in/DBIE/dbie. rbi?site=statistics.

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